In re Jefferson Cnty.

• Citation: 465 B.R. 243
• Decision Date: 06 January 2012
• Docket Number: No. 11–05736–TBB.,11–05736–TBB.
• Parties: In re JEFFERSON COUNTY, ALABAMA, a political subdivision of the State of Alabama, Debtor.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Alabama

465 B.R. 243

In re JEFFERSON COUNTY, ALABAMA, a political subdivision of the State of Alabama, Debtor.

No. 11–05736–TBB.

United States Bankruptcy Court, N.D. Alabama, Southern Division.

Jan. 6, 2012.

Patrick Darby, Christopher L. Hawkins, James Blake Bailey, Jennifer Harris Henderson, Bradley Arant Boult Cummings LLP, Jay R. Bender, Birmingham, AL, Kenneth N. Klee, Robert J. Pfister, Klee, Tuchin, Bogdanoff & Stern LLP, David M. Stern, Los Angeles, CA, for Debtor.

Memorandum Opinion

THOMAS B. BENNETT, Bankruptcy Judge.

I. Overview: The Parties, Positions Taken, Relief Requested, and Outcome

This Court is confronted by motions filed by The Bank of New York Mellon, as the Indenture Trustee for holders of warrants (Indenture Trustee) issued by Jefferson County, Alabama (hereinafter occasionally referenced as “the County”), and John S. Young, Jr. LLC, as Receiver of Jefferson County's sewer system properties (the Receiver), which have been either joined in or are supported by Syncora Guarantee Inc., Financial Guaranty Insurance Company, Assured Municipal Corporation, JP Morgan Chase Bank, N.A., Bank of America, N.A., Blue Ridge Investments, LLC, and a liquidity bank group comprised of Bank of Nova Scotia, Société Générale, New York Branch, State Street Bank and Trust Company, Lloyds TSB Bank PLC, Regions Bank, and The Bank of New York Mellon. The relief sought may be summarized relatively concisely. It is for this Court (1) to abstain “from taking any action to interfere with” the Alabama state court receivership case for Jefferson County's sewer system, (2) to determine that the automatic stays of 11 U.S.C. §§ 362(a), 922(a) do not apply to the Alabama receivership case or John S. Young, Jr. LLC, (3) to hold that John S. Young, Jr., LLC is entitled to continue as receiver of Jefferson County's sewer system properties, and (4) to modify the automatic stays of § 362(a) or § 922(a) should they apply to the Alabama receivership case or John S. Young, Jr., LLC so the receivership proceedings may continue unabated by Jefferson County's chapter 9 bankruptcy.

Summarizing the relief sought may have been relatively short. Counterposed to this brevity are legal arguments that are not just long, but also multitudinous. Many have been premised on failure to know the status in which properties are held by a receivership court and its receiver versus how they are held by a creditor with possession of collateral. Others are premised on the assumption that the jurisdictional grants of a bankruptcy court are actions of the court and not those self effectuating on the filing of a bankruptcy case. A few misapprehend the “first in time” concurrent court rules regarding in rem jurisdiction. Some wrongly extrapolate courts enforcing contract rights of private parties into acts of a state using its powers to control municipal subdivisions. One grouping seeks to have this Court overlook legislative history evidencing an obvious Congressional intent to alter earlier applications of commercial finance laws and principles in a municipal bankruptcy setting. The nature of the legal arguments has made more difficult the sorting of those with merit from those without and analyzing those appearing to have merit to see if there are inherent flaws in the perceived merits. The details of these issues and arguments are presented in subsequent sections of this opinion.

The outcome of this process is as follows. Immediately on the filing of the County's chapter 9 case, the Alabama receivership court lost its possession and control over the County's property interests in its sewer system. Under Alabama's receivership law and comparable federal and state laws on receiverships, a court appointed receiver of the kind appointed in the Alabama receivership case holds all properties for the appointing court and has no interest in the properties held. Neither does the receivership court, other than for holding the properties in custodia legis. This applies to the Receiver in this case. Under the Supreme Court of the United States' Taylor v. Sternberg, 293 U.S. 470, 55 S.Ct. 260, 79 L.Ed. 599 (1935), interpretation of exclusive federal jurisdiction over properties of a debtor and of a bankruptcy estate, along with earlier and later consistent federal authorities, filing of the County's bankruptcy case automatically and immediately transferred the properties held by the Receiver for the Alabama receivership court to this Court's exclusive jurisdiction under the grant of 28 U.S.C. § 1334(e)(1) and the Receiver, at best, holds the County's sewer system for this Court, not another court.

With one exception, the automatic stays of 11 U.S.C. § 362(a) and 11 U.S.C. § 922(a) prevent the Indenture Trustee and the Receiver from taking further actions in the Alabama receivership case and with respect to the County's sewer system properties. The exception is that set forth in 11 U.S.C. § 922(d) for pledged special revenues and their application to payment of debts secured by revenues generated by the County's sewer system. Section 922(d)'s reference to pledged special revenues refers to all revenues against which the Indenture Trustee has been granted a lien under the loan documents by and between it and the County, and includes those in possession of the Indenture Trustee and the Receiver on the date of filing of the County's bankruptcy case, all that were in the possession or control of the County as of the filing of its bankruptcy, and all revenues against which the Indenture Trustee holds a lien that are received by the Indenture Trustee, the Receiver, or the County from on and after it filed bankruptcy. Therefore, the automatic stays of § 362(a) and § 922(a) are inapplicable to these pledged special revenues. For the post-bankruptcy period, the contested pledged special revenues should be continually paid to the Indenture Trustee for the benefit of the warrant holders consistent with the contractual requirements. There is one qualification. To the extent that these pledged special revenues are insufficient to cover the necessary operating expenses of the County's sewer system as referenced in 11 U.S.C. § 928(b), the amount of the pledged special revenues otherwise payable to the Indenture Trustee will have to be reduced.

All of the abstention requests that this Court cede jurisdiction over the County's bankruptcy case or over all matters involving the Alabama receivership case and the Receiver are denied. At this time, so too are the requests for modification of the automatic stays requested by the Indenture Trustee, the Receiver, and the parties joining in their requests. The “at this time” qualifier to the stay modification denial is important. It does not preclude a future, justifiable request. As is indicated later in this opinion, one of the more difficult acquired legal skills is choosing the appropriate time to ask for what is desired. In this case, the Indenture Trustee, the Receiver, and those joining them were too quick to seek stay modification. What is in this opinion are the factual findings and legal conclusions of this Court.

II. The Torturous Route

The origins of Jefferson County, Alabama's bankruptcy case are both recent in vintage and far removed from the filing date of its chapter 9 case on November 9, 2011. Two major factors precipitating its bankruptcy are crushing debt and the loss of a large part of its tax revenues that were not earmarked for specific purposes.

The latest loss of general revenue funds occurred in March 2011 when the Supreme Court of Alabama upheld a lower court's ruling striking down a business license and occupation tax that had been enacted by Alabama's Legislature to replace a prior, similar tax that had also been declared invalid by Alabama's courts. The primary reason for the 2011 ruling is that the tax was improperly advertised. The loss of the tax revenues for Jefferson County's general fund is not due to any actions by the County. Rather, it resides with the Alabama Legislature. In 2011, the County almost had a replacement tax for its lost general revenues. Unfortunately, Alabama's Legislature and more particularly due to Alabama's singular means of enacting taxing legislation for municipalities, the County's delegation to the House and Senate, was unable to pass the replacement tax bill. This, too, is not the fault of the County especially when one knows that the County has no home rule authority and it must resort to the Alabama Legislature to implement taxes of most, if not all, sorts. All of this precipitating factor is of recent vintage.

The far removed precipitating factor is also partly one of recent vintage. It is a debt load well in excess of $4,000,000,000.00. The majority of this debt is directly attributable to massive borrowing in the form of warrants issued from 1997 to 2003 to finance the construction and repair of a sewer system owned by the County. Some portion of this financing was caused by a 1996 consent decree entered by a federal court involving the County, the State of Alabama, and the Environmental Protection Agency and other plaintiffs in litigation over pollution caused by the County's and other Jefferson County located sewer systems. The aggregate of the warrants issued between 1997 and 2003 is $3,685,150,000.00 and the unpaid principal balance is around $3,200,000,000.00.

Part of the sewer related debt involves a complex and failed combination of swap and interest rate stabilization agreements. Simplistically and at the behest of former county commissioners, the County believed it could lower the interest on warrants by shifting from fixed rates to adjusting ones. Some of what failed was the structure the so-called experts sold to the county as being able to counteract the impact of an increase in interest rates.

Superficially, the indebtedness caused by the sewer system construction and repair might appear to be only a relatively recent set of events. It is not. Why...